Effect on transactions

Assume the entity is using US GAAP, accrual-basis accounting.
For each of the following independent situations, determine the effect of that transaction on: net income; cash; total assets; total liabilities.
Complete the primer exercise by filling in the chart, showing in each area either I (increase), D (decrease), or NE (no effect). Do not leave any area blank! Each situation is independent unless indicated. (see below).

Solution Preview

1. Capital contribution (patent) - This will have no effect on the net income as it is a capital contribution. No effect on cash also as the contribution is in the form of a patent. The total assets will increase since intangible assets will increase. There will be no effect on total liabilities. The equity will increase as it is a capital contribution

2. dividend received - Dividend is received in the form of cash, so cash will increase. This will be dividend revenue and so net income will increase. Since cash increases, so total assets will increase. There will be no effect on total liability.

3. dividend declared - Since dividend is declared and not paid, there is no effect on cash. Dividend is paid after net income and so no effect on net income. There is no effect on total assets as the dividend is not paid. Total liability will increase as the dividends are payable now.

4. capital contribution (cash) - This will have no effect on the ...

Solution Summary

The solution explains the effect of given transactions on net income, cash, total assets and total liabilities.